Bond rout may have gone too far

Chinese bond yields have jumped in recent weeks as strong economic activity and rising inflation have led many to anticipate monetary tightening. Yields may have risen too far. The latest surge in producer prices has surprised many but doesn’t appear to be worrying policymakers. They rightly point out that the feed through to broader prices will be limited and that the increases are likely to fizzle out next year, long before a policy response is warranted. Admittedly, the People’s Bank has recently begun to tighten monetary conditions in response to concerns about credit risks. But it has done so very gradually. The 7-day repo rate, now the PBOC’s de-facto policy rate, has only risen slightly. The PBOC may let it edge higher in coming months but is unlikely, in our view, to carry out the kind of significant tightening that would justify the recent moves in bond prices.